Classification of MSMEs & updation for Registration / re-registration as MSMEs

The Ministry Of Micro, Small And Medium Enterprises notifies certain criteria for classifying the enterprises as micro, small and medium enterprises and specifies the form and procedure for registration (hereafter to be known as ―Udyam Registration) as  MSME, with effect from the 1^st day of July, 2020, vide notification number S.O. 2119(E) dated 26^th June, 2020 which is elaborated as under :

Classification of enterprises :-

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:–

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

The criteria for classification contains “investment AND turnover” which seems turnover criteria is inserted as an additional criteria over and above investment criteria as compared to old criteria for classification of MSME. Thus, a composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium.

If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and be placed in the next higher category but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.

All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

Methods of Calculation of Composite Criteria:-

(a) Investment in plant and machinery or equipment —

(1) The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961.

Here, Previous Year means previous year as defined in provisions of section 3 of the Income Tax Act, 1961

(2) In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.

(3) The expression ―plant and machinery or equipment of the enterprise, shall have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).

Section 43 of the Income Tax Act, 1962 contains definition of plant:- “Plant” includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession ;

Relevant text of Provisions of section 32AC and 54GB(6)(d) of the Income Tax Act, 1962 is reproduced herein under for better understanding of the definition of plant and machinery: –

Any new plant or machinery (other than ship or aircraft) but does not include—

(i) any plant or machinery which before its installation by the assessee was used either within or outside India by any other person;

(ii) any plant or machinery installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;

(iii) any office appliances including computers or computer software;

(iv) any vehicle; or

(v) any plant or machinery, the whole of the actual cost of which is allowed as deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year

Provided that in the case of an eligible start-up, being a technology driven start-up so certified by the Inter-Ministerial Board of Certification notified by the Central Government in the Official Gazette, the new asset shall include computers or computer software.

(4) The purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR.

(5) The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the Act shall be excluded from the calculation of the amount of investment in plant and machinery.

Explanation I to Section 7(1) of The Micro, Small And Medium Enterprises Development Act, 2006 as amended from time to time, states “For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.”

(b) Turnover —

(1) Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise whether micro, small or medium, for the purposes of classification.

(2) Information as regards turnover and exports turnover for an enterpris e shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.

(3) The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory.

Registration process:-

In order to help MSMEs in this difficult time in terms of labour, raw materials, permissions, finance and to capture new opportunities including manufacturing of medical items and accessories,  the Ministry of Micro, Small and Medium Enterprise launched web-portal called www.champions.gov.in (Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength) on 01^st June, 2020.

Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof:

(1) The form for registration shall be as provided in the Udyam Registration portal.

(2) There will be no fee for filing Udyam Registration.

(3) Aadhaar number shall be required for Udyam Registration.

(4) The Aadhaar number shall be of the proprietor in the case of a proprietorship firm, of the managing partner in the case of a partnership firm and of a karta in the case of a Hindu Undivided Family (HUF).

(5) In case of a Company or a Limited Liability Partnership or a Cooperative Society or a Society or a Trust, the organisation or its authorised signatory shall provide its GSTIN and PAN along with its Aadhaar number.

(6) In case an enterprise is duly registered as an Udyam with PAN, any deficiency of information for previous years when it did not have PAN shall be filled up on self-declaration basis.

(7) No enterprise shall file more than one Udyam Registration: Provided that any number of activities including manufacturing or service or both may be specified or added in one Udyam Registration.

(8) Whoever intentionally misrepresents or attempts to suppress the self-declared facts and figures appearing in the Udyam Registration or updation process shall be liable to such penalty as specified under section 27 of the Act.

Re-Registration of existing enterprises:–

(1) All existing enterprises registered under EM–Part-II or UAM shall register again on the Udyam Registration portal on or after the 1st day of July, 2020.

(2) All enterprises registered till 30^th June, 2020, shall be re-classified in accordance with this notification.

(3) The existing enterprises registered prior to 30^th June, 2020, shall continue to be valid only for a period up to the 31^st day of March, 2021.

(4) An enterprise registered with any other organisation under the Ministry of Micro, Small and Medium Enterprises shall register itself under Udyam Registration.

Updation of information and transition period in classification:-

(1) An enterprise having Udyam Registration Number shall update its information online in the Udyam Registration portal, including the details of the ITR and the GST Return for the previous financial year and such other additional information as may be required, on self- declaration basis.

(2) Failure to update the relevant information within the period specified in the online Udyam Registration portal will render the enterprise liable for suspension of its status.

(3) Based on the information furnished or gathered from Government’s sources including ITR or GST return, the classification of the enterprise will be updated.

(4) In case of graduation (from a lower to a higher category) or reverse-graduation (sliding down to lower category) of an enterprise, a communication will be sent to the enterprise about the change in the status.

(5) In case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent re-classification, an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration.

(6) In case of reverse-graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1^st April of the financial year following the year in which such change took place.

On registration, an enterprise (referred to as ―Udyam in the Udyam Registration portal) will be assigned a permanent identity number to be known as ―Udyam Registration Number.

An e-certificate, namely, Udyam Registration Certificate shall be issued on completion of the registration process.

Source of Information

• The Micro, Small And Medium Enterprises Development Act, 2006 As amended from time to time
• Income Tax Rules, 1962 framed under the Income Tax Act, 1961
• The Official Gazette of India Notification No. S.O. 2119(E) dated 26^th June, 2020 issued and notified by the Ministry Of Micro, Small And Medium Enterprises

The Author can be contacted at email id roopalcs2001p@gmail.com